I think mortgage & appraisal standards are just right

There’s so much loose cash floating around that investors don’t know what to do with the stuff.

Rather than stick it under a mattress, they’re investing in such huge quantities of bonds that mortgage rates are falling through the floor. They’re now at the lowest levels in 50 years and no one can say for sure if we’ve hit bottom.

Today’s mortgage rates are no doubt alluring, but the Internet is filled with anecdotal complaints that mortgages with such current mortgage rates are an illusion. The problem is that lender standards have tightened and appraisals that justify today’s home prices and refinances are sometimes hard to get (and get accurately).

The catch is that such complaints may be unsettling–and both accurate and beneficial.

Tighter loan standards

Let’s start with tighter lender standards.

DBRS, a credit rating service, has produced an excellent chart which compares the standards for prime loans in 2007 and 2011.

Plainly there have been some changes. For instance, the combined loan-to-value ratio (if you finance with two loans) is now 80 percent rather than 125 percent.

But think about it:

Why would any sensible lender make loans which exceed the value of the property? At this point it’s worth mentioning that most lenders did not offer such loans and most borrowers did not seek such financing.

In other words, what we have are not outrageously-conservative loan standards but rather a return to financial sanity.

According to DBRS:

Based on the minimum FICO score, maximum loan-to-value (LTV) and the requirement that a foreclosure, short sale or deed-in-lieu be at least seven years old, it is likely that most of the U.S. population will not be able to qualify for a mortgage any time soon. Consequently, DBRS expects the housing recovery to continue to lag for many years to come unless there is a loosening of underwriting criteria by the major lenders. 

New and saner underwriting standards will certainly limit financing opportunities for many borrowers–but that is right and appropriate, unless we want to repeat the mortgage meltdown of the past few years.

Moreover, the overwhelming majority of would-be borrowers have not been involved with short-sales, foreclosures or deeds-in-lieu of foreclosure, so such dings do not impact their credit standing.

As well, it should be said that FHA loan standards are largely unchanged (for instance, the down-payment requirement has been raised by .5 percent) and VA mortgages are readily available for qualified individuals.

Appraisers

As to appraisers, their obligation is to show the fair-market value of a home, usually based on comparable sales of like properties nearby.

We can readily debate such terms as “like” and “nearby,” but the reality is that if comparable sales are generally headed down, then appraisals must reflect such trends.

Foreclosure-free appraisals

There have been efforts to change the appraisal process by enacting state laws which would prohibit estimates from including foreclosure and short-sale results when computing home values.

Logically, foreclosure-free appraisal reports would produce inflated home values–good news for sellers but bad news for buyers, lenders and reality.

Just imagine if you were buying a home and were told not to consider the boarded-up property across the street when making your offer.

The process of correcting the housing market is difficult, complex and plainly not quick. As painful as it may seem, better underwriting standards and sensible appraisals are part of the deal–and far better than the standards and practices which got us into the mortgage meltdown.